The Trump Administration released a proposed rule earlier this week that would allow employers to offer tax advantaged Health Reimbursement Accounts to employees to use while shopping on the Exchange. This is a big, complicated rule that is grappling with a lot of challenging interactions but so far it seems to make a good amount of internal sense and policy sense.
One of the cases where it could help out is on reducing labor market frictions. Changing jobs should be easier for people who are insured through an individual market policy that is partially funded by their current employer via an HRA. The major mechanism of friction that I am looking at today is the out of pocket reset point.
We’ll work through an example for illustration.
Let’s look at Paige — she is in her late 20s and is happily working at Company A as a low level analyst earning $35,000 a year. Company A offers a single high deductible plan with a $3,500 deductible for insurance with a $250 month premium that comes out of her paycheck and a $600/month actual premium. Paige has a chronic condition (multiple schlerosis) that requires expensive routine treatment. She meets her deductible every year as soon as she runs her credit card through the swipe machine at the pharmacy in the first week of January. She spends 10% of her income on out of pocket expenses.
Now Paige met with Company B. Company B has offered her a job at the same salary but far more interesting work tand similar insurance. Company B will rescind the offer if she does not commit to start on November 1. Her new insurance would start on November 1.
Within this story she has a few current options allowed under current policy:
- Accept her new employer’s (Company B) policy with a start date of 11/1/18 and pay a new $3,500 deductible when she goes to the pharmacy.
- COBRA her previous (Company A) policy through the end of the year, paying $1,200 in premiums (incremental extra $700) but avoiding a new deductible. She’ll start on Company B’s plan effective 1/1/19.
- Switch to an Exchange plan until the end of the year, and pay out roughly the same in premiums (net change $0) and a new $3,000-$4,000 deductible
Any move she makes to switch to a job that is a better fit for her that pays the same is a money losing proposition. Some jobs are worth leaving even if there are real costs but those are odd cases. The more common case is that a current job is at least good enough to stay unless there is a positive reason to leave for something better. Company B is offering more interesting work but no more money. They are also offering a fairly significant hit to Paige’s earnings for the next year due to health insurance. Marginally Paige might be happier at Company B but that is going to cost her significant money ( 2% of earnings) as she needs to bridge her insurance for the rest of the year.
In an HRA supported individual market policy, her current employer (Company A) would have put its analyst employee class on the Exchange to buy similar plans. When Company B offers her the same money and more interesting work, Paige needs to do nothing about her health insurance. COBRA is irrelevant as she owns her policy. Switching jobs or not switching jobs is an easier decision with lower costs.
I’ve been scratching my head hard on the HRA rules since they were released earlier in the week and this is one of the first clear thoughts I’ve had. I think they solve real problems (including some of the family glitch problems) but this plan would at least increase labor market flexibility.